Effects of the Australian New Tax System on Income Tax and Benefits with and without Labour Supply Responses

This article uses the Melbourne Institute Tax and Transfer Simulator to examine the effects of changes to the social security and income tax system as introduced by the Australian New Tax System in July 2000. First this whole set of changes is studied, followed by a separate discussion of some of its components. From the results it is clear that the change in income tax rates and thresholds had the largest effect, because it affected a large proportion of the population whereas the changes to the benefit system were only relevant to smaller groups. Small labour supply responses are predicted to result from the reform, which lower the increase in expenditure (for singles the expectation is that the increase may even turn into a decrease) and lower the decrease in revenue. Overall, the labour supply responses are expected to reduce the cost of the reform.